]]>Leasehold properties have become a contentious issue in recent months. Whether it’s inflating ground rents, rogue property managers, or questionable lease terms, thousands of homeowners are getting caught in the leasehold property trap. The surrounding publicity means that more estate agents will be questioned on the complications of leasehold homes – so you need to guide potential buyers.

AGENTS AND THEIR BUYERS WILL NEED TO KNOW:

Fahmida Chowdhury

1 What is the duration (remaining term) of the lease?

Leasehold, in its most basic form, means that the buyer obtains the lease from the freeholder (also known as the landlord) to use the home for a number of years. Leases are usually long-term – often 90 to 120 years, but can be as high as 999 years or as short as 40 years.

The buyer would want to ensure that they will be allowed to stay at the property for the number of years required, and that the premium paid for the lease reflects the number of the years remaining on the lease. Importantly, if the remaining term is rather short, then the tenant may want to consider his or her ability to apply for a lease extension to extend the term of the lease.

2 How much annual ground rent is payable, and are there any rent review clauses?

Because leasehold is a form of tenancy, it is subject to the payment of a rent to the landlord – which is additional to the premium paid for the purchase of the property.

Ground rent is a specific requirement of the lease and must be paid on the due date, subject to the issue of a formal and specific demand by the landlord. If the tenant is buying a new property, the solicitor should be able to renegotiate the ground rent if it is excessive. Sometimes the rent is known as “peppercorn rent” – an historic term meaning that no ground rent is payable.

Buyers need to establish exactly how much the rent will increase to avoid nasty surprises in the future.

If there is a rent review clause in the lease then the fixed amount of ground rent may increase during the course of the lease term. There are many different types of rent review clauses – and calculations can be complex.

However, it is vital to establish exactly how much the rent will increase, and when, so the tenant’s solicitors can negotiate the clause to ensure that there are no nasty surprises in the years to come.

If the calculation or amount is not settled in advance then the tenant may be lumbered with an unexpected and unreasonable amount of rent to pay.

This will also make it very difficult for the tenant to assign the property in the future, so it is vitally important to be clear.

3 How much is the owner required to pay towards maintenance fees, annual service charge and my share of the building insurance?

Generally, the lease will oblige the tenant to pay a fixed percentage or a “reasonable proportion” of the total amount. It is important to establish the items that are included within the service charge payment, whether the landlord has any plans for expensive works and when these will be carried out, as the tenant will be responsible to contribute toward the major work expenses.

4 Does the buyer have the ability to alter the property or carry out major works?

The lease will stipulate whether the tenant needs to obtain the landlord’s permission before carrying out any alterations to the property or if there is absolute prohibition on alterations.

5 Does the buyer have the ability to sell or use the property as an investment property?

With the growing demand for rental homes, it is quite possible that a buyer may, later on, want to let the property. The generic term for any dealings with the leasehold interest is called alienation. This includes assignment, subletting or underletting, parting with possession, sharing occupation and charging the premises.

The landlord will have chosen the original tenant carefully based on his strength of covenant – i.e. the tenant’s ability to pay the rent and perform the covenants in the lease; so, the landlord will therefore want some control over whoever else might occupy the investment property.

Therefore, they will usually insist upon there being some restrictions in the lease against tenants dealing with the leasehold interest.

It is important that the landlord specifies in the lease whether the tenant can deal with the whole of the premises and/or part of the premises – i.e. can they assign the whole or part of the lease, or sublet whole/part.

6 Are there any other restrictions?

It is common to have restrictions such as not owning pets, not to use the premises for business purposes, not to install a satellite dish, among others.

As this may not include the balcony, loft or the roof. This also determines who is responsible to maintain each part of the property.

9 What are the tenant’s covenants?

Ask this question so that you can observe your obligations as a tenant. If the tenant does not fulfil the terms of the lease, in particular the tenant’s covenants – for example, by not paying the fees – then the lease can become forfeit.

10 What should I look out for after the purchase?

Following completion of the purchase, the buyer’s solicitors should serve Notice of Assignment and Charges on the landlord and the management company.

The buyer’s solicitors should always check whether a Deed of Covenant is required. The landlord may require the buyer to enter into a Deed of Covenant to transfer the obligations in the Lease directly to the buyer. There is normally a fee which the management company will charge and the buyer’s solicitors will need to make sure that it is drafted correctly to ensure there are no problems encountered between the buyer and the landlord post completion.

Likewise, obtain a Certificate of Compliance to submit to the Land Registry which states that the requirements in the lease for the change in ownership have been complied with.

The buyer’s solicitors should also ensure that the seller’s account is fully paid up before the buyer takes on this responsibility.

]]>A recent case of a landlord hit with a £2,745 court bill for letting a dangerous property, highlights the need for all landlords and agents to ensure that their properties are safe to live in. It’s also a reminder that home insurance is extremely important to protect homeowners and tenants from unexpected events, such as floods, fires, theft, damage and unpaid rent.

Flooding, for instance, is a major concern for some property owners. Damage to homes caused by flooding last year cost insurers an estimated £1.2 billion, which highlights the importance of having home buildings and contents insurance.

Simon Douglas, Director of AA Insurance, said, “Flood-affected homes will have seen big premium increases, especially if they have suffered two or three flood claims. They are also likely to have seen the excess for flood claims rise sharply.”

While there are wide regional variations in premiums, particularly where homes have suffered floods, research shows that overall, premiums fell sharply during the first quarter of this year.

Typical quotes on the AA’s Shoparound index (average of five cheapest premiums from direct providers and price comparison sites) for buildings insurance was down 2.6 per cent over the quarter; contents down 1.7 per cent and for a combined buildings and contents policy, down 1.8 per cent.

What your clients need

After a disaster, landlord’s insurance will re-house a tenant and pay the rent, protecting your investment.” James Castell Rentguard

Buildings insurance
Buildings insurance covers the actual bricks and mortar of the property, in the event of floods, fire and subsidence. As well as covering the property itself, some buildings insurance policies also extend their cover to outbuildings such as sheds, greenhouses and garages. “The most important thing is to protect your investment”, says James Castell at Rentguard, “and that’s why all homeowners, including – and perhaps especially – landlords should have appropriate home insurance.

Contents insurance
Contents insurance, logically, covers the contents of the home in the event of flooding, fire or theft, which can include everything from electrical appliances and carpets to items that you may use away from the property, such as cameras, jewellery and laptops.

Landlords insurance
It is imperative that homeowners seeking to let their property out realise that the insurance for a rental property is different from an owner-occupied unit. While this may seem obvious, Eddie Hooker, CEO of Total Landlord Insurance, reports that there are a number of landlords who are unsure if they have adequate insurance cover.

“Many landlords have very little idea of the level of their property insurance,” he said. Unlike standard household insurance, landlords insurance protects landlords against loss of earnings and rehousing costs should an insured event occur and the tenants have to move out.

David Wood, national Sales and Distribution Manager at Endsleigh Insurance Services Limited, commented, “It is extremely important to ensure that, as a landlord, you have specialist landlord insurance to both limit exposure to risk and protect your financial wellbeing. General home buildings and contents insurance is not adequate to cover you for all third party risks that you could encounter as a landlord.”

Rent guarantee
One major risk for landlords is that their tenants fall behind with rental payments. The number of claims for possession by landlords increased by an average of 12 per cent in the first quarter of this year compared to the corresponding period last year, according to the Government’s latest Court statistics.

In total, there were 42,520 claims for possession under the accelerated claims procedure issued in the first quarter of 2013. Although the increase in claims is owed in part to the fact that there has been a rise in the volume of rented properties, there are some worrying trends that continue. Notable black spots for arrears in England and Wales include Neath Port Talbot, Romford, Milton Keynes, Guildford, Canterbury, Pontyprid, Newport and Blackwood.

Michael Portman, Managing Director of LetRisks, said, “Tenants are facing continuing pressure on their finances as rents have increased in every region across the UK. Rents are rising nearly five times faster than wages, which is crippling millions of households.

“We would urge letting agents to continue to monitor arrears, take legal action at the earliest stage and above all ensure that landlords have adequate rent and legal insurance to protect the risk.”

Fortunately for landlords (and agents banking on receiving their rental commission), it is also possible for them to take out an insurance policy against non-payment by tenants, in the form of a rent guarantee.

Rent guarantee insurance assures that the landlord receives the rent that the tenant failed to pay, up to a period of around two years, or £50,000. Many policies also provide legal cover in case the landlord has to start legal proceedings or evict the tenant, as well as cover the property for as long as it remains vacant between tenancies.

“This insurance can cost as little as £100, depending on the amount of rent charged and good tenant references. It is available as a standalone product or you can add it to a contents and buildings insurance policy,” said Matthew Dabell of Aspire estate agents.

Tenant’s insurance
While landlords have a duty to safeguard their rental properties and income, tenants are generally responsible for protecting themselves and their belongings, which is why they should take out an appropriate tenant’s insurance when living in rented accommodation.

In the event of a fire, for instance, the landlord would get money for the loss of the building, assuming the property is insured, but the tenant’s contents may not be covered, meaning that a tenant could lose all of their belongings and get nothing back.

Like all insurances, tenant’s insurance has been created to protect against loss. Tenants looking for specialist insurance product usually have two options; to cover their contents or to cover their liability as a tenant. They can purchase both, as well as choose to add a range of additional extras depending on the insurance provider that they choose.

Tenants who do not have specialist contents insurance in place will not be able to recover the cost of replacing their personal possessions.

“Having the necessary contents cover in place can offer tenants that added peace of mind that if their possessions are accidentally lost, damaged or stolen their insurance will hopefully cover the cost for them,” said Ian Fraser, Managing Director, HomeLet.

Tenants without liability insurance would not be protected for accidental damage to their landlord’s property or belongings, even if it was not necessarily their fault, but rather caused by a flat mate or even a guest, putting their tenancy deposit at risk.

Fraser added, “[Tenancy liability cover] means that the tenant is covered for up to a set amount in case they accidentally damage their landlord’s property, furniture, fittings and fixtures that they’re responsible for under their tenancy agreement.”

When dealing with homebuyers, landlords or tenants, agents are generally not permitted to advise their clients about home insurance. However, depending on their regulatory status, an agent may be allowed to refer them to the experts who can, earning a referral fee from the insurance firm or broker in the process.

None of our agents advise as they are not FCA authorised, we take the compliance burden away from them.” Andy Halstead Let Alliance

Andy Halstead, Chief Executive Officer at Let Alliance, explained their position, saying, “None of our agents advise because they are not authorised by FCA (formerly the FSA). Let Alliance take away that compliance burden, leaving agents the easier task of just picking up the commission cheque.”

Insurance providers:

Legal 4 Landlords
Specialist insurance products tailored for rental properties which have been carefully designed to offer landlords and tenants the best insurance at the best possible prices.www.legal4landlords.com

Endsleigh Insurance
General home buildings and contents insurances, as well as cover for loss of rent when the property cannot be let because of damage to the building, following an insured event.www.endsleigh.co.uk

LetRisks
Offering a selection of insurance solutions to the lettings market, including tailored products which are designed for the individual needs of a landlord or tenant.www.letrisks.com

AA Insurance
AA Home Insurance provides new-for-old cover for building and home contents, with the exception of household linen, clothing and pedal cycles.www.theaa.com

HomeLet
HomeLet, which has existed for over two decades, focusses on ‘taking the risk out of property rental’ by providing a number of essential home insurance products aimed at landlords and tenants.www.homelet.co.uk

Let Alliance
Landlords or tenants needing buildings and/or contents insurance will find that Let Alliance has a highly competitive range of products including their innovative ‘NIL Excess’ options all designed with the individual in mind.www.letalliance.co.uk

Rentguard
Rentguard provides comprehensive insurance solutions to the residential and commercial lettings market. With a nationwide reputation for top quality service and support, they offer highly competitive rates on a wide range of landlord and home insurance products.www.rentguard.co.uk

Total Landlords Insurance
Total Landlord Insurance, which has specialised in providing comprehensive cover for landlords since 1996, aims to provide a cost effective and trusted service that adds value to new and existing landlords and tenants’ needs.www.totallandlordinsurance.co.uk